Euro Bank Stress test – top level result

The Euro authorities (CEBS) reviewed 91 banks using two scenarios. They review against benchmark and adverse scenarios. Benchmark assumes modest economic recovery, and adverse assumes a double dip recession. A host of assumption on GDP, unemployment etc were used to assess under those scenarios and are outlined in the document attached.

As a result of the exercise, under the adverse scenario 7 banks would see their Tier 1 capital ratios fall below 6%, with an overall shortfall of 3.5 bn € of Tier 1 own funds. The threshold of 6% is used as a benchmark solely for the purpose of this stress test exercise.

What struck me though is the large number that are too close to call. There are another 17 banks who came in within 1% of the 6% threshold for tier 1 capital. This a total of 24 out of 91 banks – more than a quarter. Eyeballing it, Spain, Greece and Germany are in worst shape (yes Germany).

If we look at those who are in single digits for tier 1 then that is well over 50%. All in all not an encouraging assessment despite the claims that the Euro banks are in good shape. They are still bound to the Euro governments for support to ensure that the Euro area does not experience an economic collapse in event of another 2008.